Monday, November 21, 2011 8:27 pm

The supercommittee succeeded by failing

You probably have heard today that the congressional supercomittee charged with finding a way to reduce the deficit by $1.2 trillion has failed. And as a result, you probably think the deficit isn’t being reduced.

The supercommittee was widely expected to extend the payroll tax cut and the expanded unemployment benefits. Those policies alone are expected to add 1-2 percentage points to growth next year. Some of the proposed deals included further stimulus measures like increased infrastructure spending, which would have given the economy a further boost. There was also talk of patching Medicare’s payments to doctors and the Alternative Minimum Tax, neither of which is specifically a stimulus measure, but both of which would hurt the economy if allowed to expire now.

The supercommittee’s failure throws those deals into doubt. Many Republicans are balking at extending the payroll tax cut altogether. Sen. Jeff Sessions, for instance, “said he was uneasy about extending the payroll tax holiday, calling the national debt ‘a greater threat to us’ than the weak economy.” (Think he’ll insist any extension of the Bush tax cuts is fully paid for?). Other Republicans are hoping to tie unemployment insurance and the payroll tax cut to a bill lifting the defense cuts in the trigger — a strategy that might lead to a wholly different kind of showdown. Either way, the passage of these items is now in doubt, and that means the growth picture for next year is dimming.

If growth falls by 1-2 percentage points next year, that could well mean we’re only growing by one percent or so. If events in Europe take a turn for the worse, it could mean we’re back in recession. That, and not our deficit, is the immediate threat. And it’s one the supercommittee made worse.

So, the deficit? Not that big a deal. But another recession? Quite a bit more likely today.